South African Reserve Bank

September 19, 2013

South Africa’s monetary policy committee left its repo rate at 5.0% but flagged a possible future need to tighten if inflation stays above target or rand depreciation resumes.  A statement released today by the SARB concludes

Currently, a sustained breach of the inflation target is not our central forecast, but the upside risks to the inflation outlook require careful monitoring. Should the risks to the medium-term inflation outlook deteriorate significantly the MPC will not hesitate to take appropriate action in order to maintain the integrity of the inflation targeting framework and to anchor inflation expectations at a lower level. At this stage, however, given the global uncertainties and downside growth risks, the MPC has decided to keep the repurchase rate unchanged at 5,0 per cent per annum.

Several upside price risks are mentioned.  One is that actual inflation above the 3-6% target if sustained could boost expected inflation.  On-year CPI inflation was 6.3% in July and 6.4% in August.  Another concern is high oil import prices could rise further if Middle East tensions intensify.  Still another danger involves the rand, which although above its lows now recorded a drop of around 18% this year through late August.  South Africa has a big current account deficit, equal to 6.5% of GDP; like other emerging economies with large external deficits, South Africa’s currency is especially exposed in an environment of rising global long-term interest rates associated with a more normalized Fed policy in the future.

The repo rate had been reduced ten times between December 2008 and July 2012 but a total of 650 basis points from 11.5% to its current 5.0% level.   This level is now below the 6.4% rate of inflation and even the 5.1% of core inflation.  That doesn’t provide the rand much protection if tapering mania returns.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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